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California upped the ante in the Internet tax debate on Aug. 30 when the state legislature passed the nation’s first law requiring e-businesses to collect sales taxes from buyers. The law targets so-called “click-and-mortar” firms that operate both online sales sites and physical stores in the state. Ah, but isn’t Gov. Gray Davis famously opposed to e-commerce taxes? Proponents know this and have tried to induce Davis to sign by linking the bill to another legislative proposal that extends the state’s moratorium on Internet access taxes to 2005. Davis has until Sept. 30 to decide. Yet some legal experts say that Davis’ action won’t even matter. If the governor does go along with the lawmakers, the idea of taxing sales on the generally duty-free Internet might not be easy to get past a judge, according to David Hardesty, a San Francisco, Calif., CPA who specializes in Net tax issues. Hardesty, the author of “Electronic Commerce Taxation and Planning” and the proprietor of a Web site on the topic, EcommerceTax.com, says a decision on the lawsuit would be an “open question.” The issue is tricky because companies owning real stores that must collect sales taxes, like bookseller Barnes & Noble, form wholly-owned subsidiaries to do business online, such as Barnesandnoble.com, which don’t have to collect sales taxes. The new California law aims to stop this practice, but precedent seems to go against it. When it comes to mail-order subsidiaries of retail stores, the courts have distinguished them from the stores themselves for tax-collection purposes. Hardesty concludes that the same legal logic that went into the mail-order decisions is likely to apply to sites such as Barnesandnoble.com. “The important cases were decided before the advent of the Internet, but the same reasoning will be argued by defendants who don’t want to pay taxes,” Hardesty says. The leading Supreme Court case is Quill Corp. vs. North Dakota(1992). It held that a seller or a seller’s agent must have a physical presence in a state before that state can force the seller to collect sales taxes. “State tax collectors have tried to argue that an in-state store is the agent of a related out-of-state company, such as an e-commerce site,” Hardesty says. “But they have almost always lost the argument.” Copyright � 2000 The Industry Standard

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